Circular Flow Diagram

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Circular Flow Diagram

• Created by D. Miller
• dimiller_at_nmu.edu

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Circular Flow Diagram

• The circular flow diagram is in the shape of a
  circle because all of the components work
  together and without one, it would not function.

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Producers/Businesses

• The producer is responsible for making, or
  producing, the products and providing the
  services.
• The producer requires resources from the resource
  market to make the output.
• The producer then supplies their output to the
  product market.

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What if the Producers/Businesses component was
removed from the diagram?

• There would be no one to make goods or provide
  services.
• Consumers would need to provide for themselves
  (this means growing their own food, making their
  own cars, etc.)
• Consumers would not need to provide their labor
  to producers, and, in turn, would not receive an
  income.

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Product Market

• The product market is where the output, or goods
  and services made by producers, are sold.
• Goods are tangible items, which means they can be
  held.
• Services are intangible items, which means they
  cannot be held.
• This market allows consumers to easily find the
  goods and services they need without having to
  search for someone who produces or provides them.

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What if the product market was removed from the
diagram?

• There would be no one to connect the producer and
  the consumer.
• Consumers and producers would need to find each
  other in order to make a sale. This can be very
  hard if they live many, many miles away!

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Consumers/Households

• The consumer buys, or consumes, the goods and
  services from the product market.
• The consumer offers their labor resource to the
  resource market.
• In return for their labor, consumers receive
  income which helps them pay for their consumption
  of goods and services.

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What if the Consumers/Households component was
removed from the diagram?

• This would be worse than if there were no
  producer, because there would be no one to
  benefit from the goods and services the producer
  provides.
• There would be no one giving the labor resource
  to the resource market.

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Resource Market

• The resource market is where the resources needed
  by producers are brought together.
• The resources in this market are land, labor,
  capital, and entrepreneurial talent.
• This market allows producers to easily find the
  resources they need.

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Types of Resources

• Land the piece of property where the buildings
  and landforms will be placed.
• Labor the physical work that is needed to make
  the products or provide the services.
• Capital the machines that is used to produce
  the products.
• Entrepreneurial Talent the bright ideas that
  people contribute to making or improving the
  goods and services.

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What if the resource market were removed from the
diagram?

• There would be no one to connect the producer to
  the resources needed to make the goods or provide
  the services.
• Producers would need to find the resources they
  needed, which is harder than being able to find
  them in one place.

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Circular Flow Diagram Internal Resources

• Circular Flow Diagram Home Page
• Circular Flow Diagram Worksheet
• Circular Flow Diagram Worksheet Answers
• Circular Flow Diagram Test
• Circular Flow Diagram Test Answers

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Circular Flow Diagram On-Line Resources

• http//www.econedlink.org
• Economic Skills for Elementary Students
• http//go.hrw.com/secure/ss/general/utpdf/zvch21S1
  .pdf
• Lesson Main Page
• http//ecedweb.unomaha.edu/K-12/home.cfm

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• The End